China's growth engine is sputtering, and the impact of the global financial crisis is "worse than expected," according to premier Wen Jiabao. The country's industrial output grew 8.2% year-on-year in October, the slowest pace of growth in seven years, and down 3.2% from September, the National Bureau of Statistics reported on Thursday.
"China's economy is losing momentum faster than expected, and the central bank needs to act,'' notes Dong Tao, chief Asia economist at Credit Suisse. "We hope this is the worst quarter and things start looking better next year.''
Other economists believe the grim news will continue to flow. "Industrial production growth will continue to decline as China's export-oriented industries scale back their operations due to lower demand from the US and Europe," says JP Morgan's chairman of China equities, Jing Ulrich. "Indicating a contraction in manufacturing, October's Purchasing Managers Index was a record low at 44.6, down from 51.2 in September."
China's export growth declined to 19.2% YoY in October, and export growth in Guangdong province, the powerhouse of China's export economy, fell to 13.5% in the first nine months of the year, compared to 22.3% last year, notes Ulrich. Against a backdrop of slowing external demand, a growing number of factory closures have been reported in the light-manufacturing hub of the Pearl River Delta, considered the factory floor of the world. "The current challenges are forcing China's export manufacturers to consolidate, move to higher-value added production, and target the domestic market," says Ulrich.
The deceleration in production growth was much sharper than expected, says Moody's Economy.com economist Sherman Chan, "but the outlook for China's industrial sector is not all doom and gloom."
The $586 billion fiscal stimulus package announced days ago "should help give the industrial sector a helping hand", notes Chan, and an improved infrastructure will facilitate production and trade, while efforts by the government to encourage innovation will raise productivity and output quality.
But in the short run, Chinese manufacturers are certainly experiencing a difficult time, notes Chan.
With the US in recession – and other major economies on the edge of one – external orders for Chinese products will likely decline further. Manufacturers that had primarily relied on external demand will be hit hardest by the global economic downturn, she adds. "It appears that more factory closures are on the way, as businesses struggle to stay afloat," she warns. Premier Wen too offered grim words, noting that the impact of the global financial crisis on China was "worse than expected," according to the official China Daily.
Economists expect China's central bank to respond to Thursday's gloomy data by cutting interest rates for the fourth time in two months. The one-year lending rate is currently at 6.66%, after three cuts totalling 81 basis points since September.
China's economy grew at 9% in the third quarter, the slowest pace in five years. The one positive sign is that inflation eased to the slowest pace in 17 months in October, and money supply expanded by the least in three years.
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